A senior employee joins a company with an attractive salary package. Along with the annual bonus, the offer includes an equity award that will vest over four years. The employee stands to gain as the business grows, while the company gains an incentive to retain their contribution over the same period.
This arrangement is an example of a long-term incentive plan (LTIP). Companies use LTIPs to reward sustained performance and connect employee compensation with business objectives. The rewards may come in company shares or deferred cash, depending on the plan.
In India, LTIPs are relevant to listed companies, private businesses, and startups building long-term compensation programmes. Their structure affects employee rewards, company ownership, accounting, and regulatory compliance.
What Is a Long-Term Incentive Plan?
A long-term incentive plan is a compensation arrangement that rewards employees for contributing to a company’s performance over an extended period. The plan usually links the reward to continued employment, specific business targets, or both.
Unlike an annual bonus, which generally rewards performance over a shorter period, an LTIP focuses on outcomes that take time to achieve. These may include revenue growth, profitability, share price appreciation, or strategic business milestones.
Companies commonly use LTIPs for senior executives and employees in key roles. Startups may also extend equity-based incentives to a wider group of employees as part of their compensation strategy.
1. How Does an LTIP Work?
An LTIP begins with a company defining the objectives it wants to reward. It then selects the incentive type and sets the conditions employees must meet before receiving the benefit.
Consider a technology company that grants a senior product manager 2,000 stock options under a four-year plan. The options vest over the agreed period, provided the employee meets the service conditions. The employee can exercise vested options according to the scheme rules.
A different company may offer a performance-based cash award linked to three-year revenue growth. The employee receives the payout after the measurement period, provided the company achieves the specified target.
The structure depends on the company’s objectives and the roles covered by the plan.
2. How Long Does an LTIP Last?
An LTIP commonly runs for three to five years, although the actual duration depends on the award and its conditions.
A three-year plan may reward employees after a defined performance period. A four-year equity plan may release awards in annual instalments. Some plans also include a separate exercise window or holding period after vesting.
The grant agreement should explain the award period and the dates that determine employee eligibility.
What Are the Different Types of Long-Term Incentive Plans?
Companies can structure LTIPs around equity ownership, share price appreciation, or deferred cash rewards. The choice determines how employees receive value and how the company accounts for the incentive.
1. Employee Stock Option Plans (ESOPs)
An Employee Stock Option Plan (ESOP), also called an Employee Stock Option Scheme (ESOS), gives employees the right to purchase company shares at a predetermined exercise price after the options vest.
For example, a startup grants an employee 1,000 options at an exercise price of ₹100 per share. If the options vest and the share value later reaches ₹250, the employee may exercise the options at ₹100 per share, subject to the scheme terms.
The potential gain depends on the difference between the share value and the exercise price. Employees also need to account for the cost of exercising their options and the applicable tax.
Companies can read Hissa’s guide to setting up and managing ESOPs in India for more detail on scheme design and administration.
2. Restricted Stock Units (RSUs)
Restricted Stock Units are a promise to deliver company shares after employees meet the specified vesting conditions. Employees generally receive the shares without paying an exercise price.
For example, a company grants an employee 400 RSUs over four years. If the employee meets the vesting conditions, the company delivers the shares according to the schedule.
RSUs can be useful when a company wants to provide employees with direct share ownership after vesting. Their value at delivery depends on the share price at that time.
3. Stock Appreciation Rights (SARs)
Stock Appreciation Rights reward employees for an increase in the company’s share value over a specified period. The employee receives the appreciation in value, subject to the scheme’s terms.
For example, an employee receives SARs linked to 500 shares when the reference price is ₹200 per share. If the share value reaches ₹300 at settlement, the appreciation is ₹100 per unit. The employee’s award is based on that increase, subject to the applicable conditions.
Companies may settle SARs in cash or shares, depending on the scheme structure and applicable regulations.
4. Performance Shares and Performance Units
Performance shares are equity awards that vest when employees or the company achieve predefined targets. These targets may relate to revenue growth, profitability, or shareholder returns.
For example, a company may grant a senior executive 1,000 performance shares. The final number delivered depends on whether the business meets its three-year profit target.
Performance units follow a similar principle but may be settled in cash or another form of value, depending on the plan.
5. Deferred Cash Incentives
A deferred cash incentive is a reward earned over a defined period but paid at a later date. The company may link the payout to continued employment or long-term business performance.
For example, an employer may defer 30% of an executive’s annual performance bonus for three years. The deferred amount becomes payable after the employee completes the required service period and meets the plan conditions.
Cash-based LTIPs can help private companies reward employees without issuing additional shares. They also create a future cash obligation that the company must plan for.
Equity-based and cash-based LTIPs
Equity-based awards connect employee rewards to company ownership or share value. Cash-based awards provide a monetary payout under the plan’s conditions. The choice affects dilution, cash flow, employee ownership, and administration.
How Do LTIP Vesting Schedules Work?
Vesting determines when an employee earns the right to receive an LTIP award. The schedule may depend on continued employment or achievement of specific performance targets.
1. Time-based vesting
Time-based vesting makes the award available after an employee completes a specified service period. Cliff vesting and graded vesting, covered below, are the two common ways to structure time-based vesting.
For example, an employee receives 1,200 RSUs under a three-year schedule. If the award vests in equal annual instalments, 400 RSUs vest at the end of each year, provided the employee meets the service conditions.
This structure encourages employees to remain with the company through the vesting period.
2. Cliff vesting
Under cliff vesting, the entire award vests after the employee completes a specified period.
For example, an employee receives 600 stock options with a three-year cliff. The options vest after the employee completes three years of service, subject to the scheme terms.
An employee who leaves before the cliff date generally forfeits the unvested award.
3. Graded vesting
Graded vesting releases an award in instalments over the vesting period.
Suppose an employee receives 1,000 RSUs under a four-year schedule. The company may vest 25% of the award each year. The employee receives 250 shares after each completed year, subject to the plan conditions.
This structure provides employees with periodic rewards while maintaining a longer-term retention incentive.
4. Performance-based vesting
Performance-based vesting depends on the achievement of predefined targets. The company may measure individual results or overall business performance.
For example, a company may link an executive’s award to achieving a revenue target of ₹500 crore over three years. The employee receives the award if the company meets the target and the other grant conditions are satisfied.
Some plans combine performance and service requirements. Employees must meet both before the award becomes payable.
What Are the Benefits of Long-Term Incentive Plans?
An LTIP can influence how employees approach their roles and how companies plan their compensation budgets. The benefits depend on the award structure and the objectives attached to it.
1. Benefits for employers
Employee retention: Multi-year vesting schedules encourage employees to remain with the company through the award period.
Performance alignment: Companies can connect rewards to long-term targets such as profitability or revenue growth.
Talent attraction: Equity awards can strengthen a compensation package, particularly when a business competes for experienced professionals.
Ownership participation: Share-based awards can give employees a financial interest in the company’s performance.
2. Benefits for employees
Additional compensation: Employees receive a reward beyond their regular salary and annual bonus.
Potential wealth creation: Equity awards can gain value as the company’s share price increases.
Long-term recognition: Multi-year incentives recognise contributions that extend beyond a single performance cycle.
Share ownership: Employees who receive and hold company shares can participate in the benefits associated with ownership, subject to the rights attached to those shares.
What Are the Challenges of Implementing an LTIP?
LTIPs can create retention and performance benefits, but companies need to manage their financial and administrative responsibilities carefully. Poorly defined award conditions can also lead to confusion among employees.
1. Equity dilution and cash obligations
Equity-based awards can increase the number of outstanding shares when the company issues new shares. Existing shareholders may experience dilution as a result.
Cash-based awards create a different obligation. The company must have sufficient funds available when the deferred incentive becomes payable.
2. Complex performance conditions
Performance targets need clear definitions and measurable outcomes. A target based on revenue growth, for example, should specify the measurement period and the accounting basis used.
Employees also need to understand how changes in their roles or business conditions affect their eligibility. Clear grant documents help reduce disputes over award calculations.
3. Administration and recordkeeping
An LTIP may involve several grant dates and vesting schedules. Companies need accurate records of employee eligibility, award quantities, and settlement details.
A manual process can become difficult to maintain as the number of participants grows. Centralised equity records help HR and finance teams track awards and ownership changes.
How Do Companies Design an Effective LTIP?
A well-designed LTIP connects the reward with the company’s long-term objectives. The plan should also explain how employees earn the award and when they receive it.
1. Define the business objectives
The company should identify the outcomes it wants the plan to support. A business focused on profitability may choose financial performance targets, while a startup preparing for expansion may prioritise retention among key employees.
The objectives should be measurable over the full award period.
2. Select the incentive structure
The company should choose between equity-based and cash-based awards based on its ownership strategy and financial position.
A listed company may use RSUs or performance shares. A private startup may prefer stock options or a deferred cash award, depending on its capital structure and available resources.
3. Set vesting and performance conditions
The grant agreement should specify the vesting period and the conditions attached to the award.
For performance-based plans, the company should define the target, measurement period, and payout calculation. Employees should be able to understand how their actions affect the final reward.
4. Define employee eligibility
Companies should identify the roles and employee groups covered by the plan. Senior executives may receive awards linked to company-wide performance, while employees in specialised roles may receive incentives tied to specific business objectives.
The eligibility criteria should be consistent with the company’s compensation policy and applicable regulations.
5. Communicate the terms clearly
Employees should receive grant documents that explain the award value and vesting conditions. The company should also clarify what happens when an employee resigns, retires, or is terminated.
Clear communication helps employees understand the value and limitations of their incentives.
What Are the LTIP Regulations and Compliance Requirements in India?
The regulatory requirements for an LTIP depend on the company type and the incentive instrument. Listed companies issuing share-based employee benefits must follow SEBI regulations. Companies issuing ESOPs under the Companies Act must also meet the applicable corporate law requirements.
1. SEBI regulations for listed companies
Listed companies in India must follow the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, when implementing covered share-based employee benefit schemes.
The regulations address scheme approval and administration. They also cover eligibility, disclosures, and the responsibilities of the compensation committee.
Companies must obtain shareholder approval through a special resolution before implementing a covered scheme. Additional approvals may apply to specific grants or changes to the scheme.
2. Companies Act requirements for unlisted companies
Unlisted companies issuing employee stock options must comply with the Companies Act, 2013, and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
The requirements cover matters such as shareholder approval and the terms of the ESOP scheme. Companies should also maintain the required records and disclosures.
The exact provisions depend on the instrument being issued. A cash-based incentive plan, for example, may have different requirements from a scheme that grants company shares.
3. Tax treatment of LTIP awards
The tax treatment depends on the type of incentive and when the employee receives its value.
For ESOPs, the taxable perquisite generally arises when the employee exercises the option and receives the shares. The difference between the fair market value and the exercise price is considered salary income under the applicable rules.
A later sale of the shares may result in capital gains tax. RSUs and other awards can have different tax events depending on their structure and settlement.
Companies should obtain tax advice when designing the plan. Employees should also understand the tax implications before exercising options or selling shares.
4. Accounting requirements
Companies must account for share-based payment arrangements under the applicable accounting framework.
Ind AS 102 applies to companies required to follow Indian Accounting Standards. Other companies may need to follow the applicable ICAI guidance on accounting for employee share-based payments.
The accounting treatment depends on the award structure and whether the arrangement is equity-settled or cash-settled.
Listed and unlisted companies follow different requirements
SEBI’s 2021 regulations govern covered share-based employee benefit schemes in listed companies. Unlisted companies issuing ESOPs follow the Companies Act and the applicable rules. Companies should identify the relevant framework before approving an LTIP.
How Can Companies Manage LTIPs as They Grow?
Managing an LTIP involves more than issuing an award letter. Companies need a reliable record of grants and vesting events, along with clear information about employee ownership.
A centralised equity management system helps HR and finance teams maintain grant records and track changes in shareholding. It also gives employees and administrators a clearer view of the awards issued under the scheme.
Hissa provides equity management solutions for companies managing employee ownership. Its platform supports ESOP administration and equity records for businesses at different stages of growth.
Companies can also read about Hissa’s ESOP management capabilities and review its pricing plans.
Suggested Reads:
- What Are the Different Types of Stock Option Plans in India?
- Sweat Equity Shares in India: Rules, Limits and How They Differ from ESOPs
- ESOP Compliance in India: A Complete Guide for Companies
